Felix Salmon

HAMP failure of the day

Felix Salmon
Sep 10, 2010 16:05 UTC

David Lazarus manages to prompt one of the great moments in bank public relations today, which would almost be funny if it wasn’t so infuriating. He’s telling the story of Mike and Ellen Kahara, who signed up for a HAMP mortgage-modification program through their lender, Wells Fargo. They made all their HAMP payments in full for the three-month trial period, and then continued to make payments as Wells dawdled over whether or not to make the loan-mod permanent.

Eventually, on August 11, Wells Fargo sent the Kaharas a letter saying that the bank had rejected their application for a permanent loan modification. That’s bad enough — but the bank made matters infinitely worse by then turning around and selling the Kaharas’ house, in a foreclosure sale, just five days later, on August 16. Without even bothering to notify the Kaharas that they were foreclosing in the first place.

When Lazarus called up Wells flack Jennifer Langan to ask what on earth was going on, he got this priceless response:

She said the bank shouldn’t have told the Kaharas that their home wouldn’t be sold within 30 days. “It was clearly a mistake that we put that in the letter,” Langan said.

Evidently, refusing to give the Kaharas a permanent loan modification, or foreclosing five days after rejecting their application — that’s just fine. The main mistake that the bank made, in its own eyes, was in telling the Kaharas that they could stay in their home for another 30 days, when in fact they couldn’t.

I’m hoping that pretty soon public records are going to come to light allowing us to find out exactly what the purchase price was: how much money Wells Fargo got for selling the Kaharas’ home from under them. In an ideal world, the buyer, Pacifica, would make a healthy return on its investment by renting out the house to the Kaharas for the $1,400 a month they were paying on their modified mortgage, but that doesn’t seem to be the case. Instead, they’re telling the Kaharas that they have to be out of the house immediately.

It’s a dreadful story, which is being played out in many other homes around the country. And it’s a clear indictment of HAMP, as well as of Wells Fargo.


I am amazed that there are people who blame people for falling behind in mortgage payments. With snide remarks like making adult financial decisions. In a perfect black and white world I would tend to agree. But, because we have situations that change, loss of work, wages etc. It happends, falling behind. Then why doesn’t anyone point out the fact that procedures and banking/servicers behavior are not accountable for their actions and wrong doings? Its not alway black and white, and servers are in the business of making money when your behind in payments – with many of them keeping you in their sweet spot. Someone should produce a report about the revenue that is generated from these fees and compare that to the insentive the goverment HAMP program provides to the servers – common people where is the accountablity? Where is the partneship? This certianly doesnt feel like America. I am ashamed of the capitalism that has rapped our country from within our borders.

Posted by JoeSituation | Report as abusive

How income inequality is changing

Felix Salmon
Sep 10, 2010 15:43 UTC

Bill Easterly thinks that inequality is fractal:

Income inequality behaves like a fractal: income is very uneven at large scales and at small scales…

We are going to go from global to the US to the New York City metro area to the neighborhood of NYU in Manhattan. At each scale, there is a remarkably high level of inequality across space.

The rich coastal cities in the US and the poor rural South. Rich lower and midtown Manhattan and poor South Bronx. Rich West Village and Soho and poor Lower East Side.

This is true, as far as it goes, but I think it misses the fact that the degrees of inequality at various different scales are changing in important ways. Over the past few decades, the gap between China and the US, to take one obvious example, has narrowed sharply — even as the degree of inequality within both China and the US has increased markedly.

The trend, then, I think, is for inequality to increasingly ignore national borders. You can get rich clusters across borders, as in say the area between Porto Alegre, Montevideo, and Buenos Aires, or any number of megaregions in Europe. At the same time, the gaps between the richest and the poorest areas of most countries are only growing larger.

Easterly’s map of the world, where every country is a uniform color, conceals more than it reveals. Once upon a time, national borders were useful boundaries to use when measuring per-capita income across the planet. And given that statistical agencies are still national, that’s not going to change any time soon. But those numbers are going to be less and less informative as pockets of wealth spring up in poor countries, and pockets of poverty persist in middle-income nations.


These are very good points. Korzeniewicz & Moran’s 2009 book, Unveiling Inequality, argues that “the key institutional arrangements underpinning low[er] inequality within high-income countries simultaneously were key to the persistence of high[er] inequality in inequality between nations” (xxiii). Those arrangements are eroding, and there’s a long way for high-income countries’ citizens to fall. Consider this quote from their book:

“The magnitude of global disparities can be illustrated by considering the life of dogs in the United States. According to a recent estimate . . . in 2007-2008 the average yearly expenses associated with owning a dog were $1425 . . . For sake of argument, let us pretend that these dogs in the US constitute their own nation, Dogland, with their average maintenance costs representing the average income of this nation of dogs.”

“By such a standard, their income would place Dogland squarely as a middle-income nation, above countries such as Paraguay and Egypt. In fact, the income of Dogland would place its canine inhabitants above more than 40 percent of the world population. . . . And if we were to focus exclusively on health care expenditures, the gap becomes monumental: the average yearly expenditures in Dogland would be higher than health care expenditures in countries that account for over 80% of the world population.” (xv)

Posted by FrankPasquale | Report as abusive

A new kind of stock-price chart

Felix Salmon
Sep 10, 2010 13:54 UTC

I love Kristina Peterson’s profile of Briargate, an algorithmic prop-trading firm (it’s an anagram of “arbitrage”) which has more or less given up on trading during the middle of the day.

High-frequency strategies like Briargate’s work best when there’s maximum liquidity, and that’s definitely during the first and last hour of the trading day. So instead of babysitting their computers at noon, Briargate’s principals go for long walks, or visit their children’s schools, or go out for pizza — and don’t even notice when something like the flash crash happens. (They were at the movies at the time.)

All of which makes me wonder whether we shouldn’t be presenting intraday stock charts a little bit differently. Right now, they invariably construct the x-axis so that every given unit of time (one minute, one hour, whatever) takes up the same amount of horizontal space. Underneath that you sometimes see a volume graph which shows you the important parts of the chart to look at.

Does anybody publish charts where the x-axis has a constant volume chart along the bottom, spreading out high-volume trading periods and skipping over low-volume periods relatively quickly? Is there a way of publishing data so that every tick, or every 1,000 shares traded, takes up an identical amount of space on the x-axis? The axis could still be labeled by hour or minute, it’s just that those labels would no longer be equidistant.

I’m pretty sure that such a chart would provide an interesting and fresh perspective on how stocks move. But of course it would be hard to generate in Excel, so maybe that’s why I’ve never seen one.


Hi Felix:

The answer is the “tick” chart. Traders have used this format for years. The data can be plotted in increments of x transactions or x contracts/volume. When the market is “dead”, fewer bars are plotted.

Teresa Lo

Posted by Teresa_Lo | Report as abusive


Felix Salmon
Sep 10, 2010 05:31 UTC

“If you eat out a lot then you should not live on the Upper West Side, or you should have a chauffeur.” — NYM

Another one for the annals of security theater: “The lockdown was lifted after the pony was blown up” — Atlantic Wire

David Thorne feeds the trolls. Hilarity results — Thorne

The best thing about Apple’s app store guidelines is that they’re actually written in English — Apple (PDF)

The cover of the new Woodward book is one spectacularly ugly Photoshop fail — Yahoo

On select nights in September, Transportation Alternatives offers free valet bike parking to theatergoers — Gothamist

American despond

Felix Salmon
Sep 10, 2010 05:24 UTC

This is the most depressing poll you’re likely to see this electoral season, and it’s not even political. StrategyOne decided that ordinary Americans can’t possibly be worse economic forecasters than economists, so they asked whether we’re going to have a double dip. 65 percent said yes, we are. And the rest of the answers are entirely consistent with that: 48 percent of Americans think that our best days are behind us. 71 percent think that “America is fundamentally broken and not working”. 79 percent are planning to spend less money at Christmas this year than they did last year:

“The American public — characteristically optimistic and resilient — is looking around and seeing more and more dark storm clouds approaching on the horizon,” said Bradley Honan, senior vice president of StrategyOne. “Not only has confidence in the economy been severely undermined, there are now real, significant doubts emerging about our country.”

When such dark forecasts are so widely held, of course, they become self-fulfilling. I see only two grounds for hope: either the poll is fundamentally flawed in its design (I have no reason to believe that it is, but it would be great to see someone else trying to replicate these results); or else Americans might actually behave in a relatively high-consuming and optimistic manner, even if they don’t actually think that way when asked.

In any case, it would be nice to see the bulls out there come up with some good explanation of how their forecasts are consistent with these survey results. Because on the strength of these answers, the double dip is coming. And it’s going to be a nasty one, too: 77 percent of Americans think it’s going to be at least as bad as the current recession.


The chickens are coming home to roost.

The philosophy of shipping overseas any job that isn’t nailed down has finally worn the optimism of the middle and working classes away. Soaring expenses, sagging incomes, vanished job security: between the rock and these hard places, optimism is destroyed.

No one has any faith in the business elites, but we know that they own the political class, lock stock and barrel.

We have two parties who are exactly the same when it comes to jobs: hands off.

These problems have been building for decades and the problem is the political system cannot address the problems of the voters, without biting the hand that feeds it.

This is a recipe for extremism and instability.

Posted by nyet | Report as abusive

Why Basel III won’t hurt banks or the economy

Felix Salmon
Sep 10, 2010 04:24 UTC

The new Basel III capital ratios are going to be announced this weekend, and the banks are going to complain about how much the new ratios are going to raise lending costs and hurt economic growth. The BIS, of course, has taken these complaints seriously, and has released two monster reports calculating exactly what the impact of higher capital standards will be.

The first report looks at the long-term effects of higher capital standards. They look something like this:


On the x-axis, you have the capital ratio; on the y-axis, you have the long-term effect on GDP growth rates. (The effect is zero at a 7% capital ratio, since that’s what the BIS is assuming we have, globally, right now.) As you can see, at just about any realistic point on the graph, higher capital ratios increase the long-term growth rate. The green line is the conservative one: that’s the line which assumes that while financial crises are harmful in the short term, they have no long-term repercussions. The red line, more realistically, assumes that financial crises result in a permanent, if moderate, reduction in GDP.

Most of the benefit comes from smaller and less harmful financial crises. But there is cost, if a modest one, in higher loan spreads: the report calculates that each 1 percentage point increase in the capital ratio raises loan spreads by 13 basis points. And that’s assuming that banks keep their return on equity at a high 15%. If the new safer banks are OK with a 10% return on equity, then the rise in lending spreads drops to just 7bp for every percentage point increase in equity.

The second paper looks at the effects of how we get there from here. Won’t there be economic consequences to forcing banks to raise all that extra equity? Yes:

A 1 percentage point increase in the target ratio of tangible common equity (TCE) to risk- weighted assets is estimated to lead to a decline in the level of GDP by a maximum of about 0.19% from the baseline path after four and a half years (equivalent to a reduction in the annual growth rate of 0.04 percentage points over this period).

That’s barely enough to be measurable.

As an excellent story concludes in the latest issue of Global Risk Regulator,

The two reports, released in mid-August, represent a powerful counterblast to banking industry claims that the credit and liquidity reform proposals, issued by regulators on the Basel Committee last December, are likely to significantly reduce economic growth in some countries that are still recovering from the devastating financial crisis.

GRR got some reaction to the reports from banker types, and they make for pretty hilarious reading. Here’s Simon Hills, executive director of the British Bankers’ Association:

“What if they have got the analysis wrong? It is bit like the global warming question. Even if you are a global warming skeptic the impacts are so potentially catastrophic you would want to be doing something just in case you were wrong. In the same way, the authorities should err on the side of caution in calibrating the new Basel framework and determining the period over which it is to be phased in, just in case the macro economic analysis has made some simplifying assumptions that turn out not to hold true,” Hills argues.

Well, yes. But it’s pretty obvious that the potentially-catastrophic impacts are much more likely to be felt if we do too little, in terms of raising capital requirements, than if we do too much. Catastrophes come from crises, not from raising capital ratios to a level which most US banks already comfortably exceed.

The banks have their own report, of course, which paints a much more doom-and-gloom scenario — but, crucially, it assumes that their funding costs will rise if capital requirements are tightened. That doesn’t make much intuitive sense: after all, if banks have more capital, they’re safer, and if banks are safer, their funding cots should fall. But the BIS report, conservatively, doesn’t assume any decrease in funding costs: it just reckons they’ll stay where they are.

I can see the banks’ argument: if lots of banks are all forced to raise lots of new capital at the same time, then demand for new capital could exceed supply, and costs could go up. But I’m not convinced, especially since the BIS will give the banks at least four years to raise the new capital through securities issuance or just through making profits.


The Basle reports make the popular assumption that increased borrowing costs hurt economic growth. There is actually a very good reason for supposing that the effect is exactly the opposite, that is to boost economic growth, and for a reason that has nothing to do with reducing the chance of another credit crunch. The reason is thus.

Banks indulge in maturity transformation which results in artificially low interest rates for borrowers. This results in more than the optimum amount of investment. Higher capital standards effectively reduce the extent of maturity transformation, thus the result is something nearer the optimum amount of investment. I go into this point in more detail at the following URL, see point No 4 in particular:

http://ralphanomics.blogspot.com/2010/07  /brad-delong-is-wong-on-maturity.html

Posted by RalphMusgrave | Report as abusive

Norway’s long Greece

Felix Salmon
Sep 9, 2010 19:44 UTC

I’m not entirely clear on what Bloomberg’s Josiane Kremer is trying to say here, on the subject of Norway’s sovereign wealth fund loading up on Greek debt:

“The point is, do you expect these guys to default?” said Harvinder Sian, senior fixed-income strategist at Royal Bank of Scotland Group Plc, in an interview. “Norway has taken the view that they will not. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default.”

Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” [finance minister Sigbjoern] Johnsen said in an Aug. 27 interview…

The 750 billion-euro ($962 billion) package crafted by the European Union and the IMF as speculation a euro member might default undermined the common currency “has proved successful,” Johnsen said. The IMF said in a Sept. 1 report that “current market indicators of default risk seem to reflect some market overreaction.”

The yield premiums investors demand to hold Greek, Spanish and Irish debt rather than German bunds are even wider than before the EU announced its rescue package on May 10…

Since June, the euro has strengthened 7.5 percent against the dollar, signaling investors are satisfied the EU’s measures, including stress tests on 91 of its biggest banks and liquidity support, have been effective in stemming the crisis.

It’s worth walking slowly through all this. First, is there really a market consensus that Greece is going to restructure or default? I think there probably is — but it’s not easy to tell by looking at markets, because the markets are being deliberately skewed by the ECB. If you look at the benchmark five-year government bond, it’s trading at about 70 cents on the dollar, with a coupon of 3.7%, to yield 12%. There’s clearly a significant default probability baked in there. But at the same time, if Greece does default in the next five years, anybody who bought that bond today will almost certainly end up losing money. Greece is trading very wide, but it’s not trading at distressed levels.

At the same time, having a long-term perspective doesn’t help at all. If a debtor defaults, it doesn’t matter how long your perspective is, you’re likely to lose money, and your bonds aren’t ever going to be worth what you paid for them. Unless you’re some kind of distressed/vulture investor, and Norway certainly isn’t that, default means you’re going to suffer a loss, whether you hold on to your paper or whether you sell it. End of story.

So how, exactly, has the European bailout package “proved” successful? Kremer looks at two indicators: debt spreads, which have widened out, and the euro, which has strengthened. The former, it seems to me, is a more reliable indicator than the latter: currencies move for all manner of reasons, and it’s pushing the limits of credulity to say that the euro has strengthened because the Greek bailout was a success, even as the debt market is as worried as ever about the country’s creditworthiness.

I’m also worried about the fact that the Norwegian finance minister is out there talking up his sovereign wealth fund’s book: it introduces an utterly gratuitous level of politicization to a process which should be much more disinterested. If the fund’s managers think that they can outperform their index by loading up on Greek debt, that’s fine. But let’s not turn their trading position into some kind of noble stance: it isn’t, and it shouldn’t be, either.


To understand this you must know things about Greece. I did research as an socialantropologist on Greece. Common people doesnt like the state in greece. They are entrepenoers and the islands have served them well since the they became part of the ECC and got a strong currency and automaticly raised prices much higher and had a convertible currency. Much of the EU money has gone to create a infrastructure for the tourist industri. But much of the industry is privatly owned. Greek businessmen dont like to pay tax and do almost anything to avoid that. But like France and Sweden the control is very hard. Unlike countries like italy or spain who has almost no control of whom pay or not. The individual family in Greece is relativly well off and owns different business but the goverment debt is totally out of control. And the IMF austerity measures taken are as always just destructive and lowers the possibility to tax and are selling greek goverment owned property and enterprices to cover the morgages and the intrestrates which are austronomous. Greece will default and will be kicked out of the EU. This will not have any enourmous effect on the greek people but for the German banks who put up the loans and for the Euro the story is different. This will mean that the euro looses further value and on top of that very angry Germans. The beautiful islands of greece will once again be more cheap for vacation when they are back on the drachmer and somehow that was when I spent time in greece. When it was cheap. Today everything is on much higher standard so it will not be like in the good old days. Cheaper Euro and Old school greece. Is democracy good when a country delibratly has a strategy of using global subsides to increase its own wealth when its not a third world country. If I were a swede or a german I would immediatly get of the EU.

Posted by Herring | Report as abusive

Fine Rubin!

Felix Salmon
Sep 9, 2010 16:54 UTC

On October 15, 2007, Citigroup CFO Gary Crittenden lied to investors and analysts listening to the bank’s quarterly earnings call. He said that Citi’s subprime exposure had fallen to $13 billion — but that wasn’t true. In fact, it was more like $53 billion, once various super-senior tranches and liquidity puts were included. He knew all about those risks, he didn’t mention them, and as a result he has agreed to pay a $100,000 fine.

Now, the SEC has admitted that Bob Rubin knew about the risks too — along with Chuck Prince, Bob Druskin, and others. Rubin was chairman at the time: it was ultimately his job to oversee the management of the company and to ensure that shareholders were fully apprised of the risks on Citi’s balance sheet. But instead of pushing for transparency towards shareholders, he stood quietly by while Crittenden lied to them, and said nothing.

The SEC wants to settle with Citigroup — which is to say, impose pain on its current shareholders, many of whom are the victims here — without fining Rubin at all. That’s silly. I hope that Judge Ellen Huvelle pushes for some kind of formal punishment of Rubin. It couldn’t happen to a more deserving man.


If you’re going to be a member of the club, you want to be a level or two higher than these guys, who, though they get for the most part slaps on the wrist, they still end their lives ignominiously and often much less wealthy. You want to be a Jimmy Johnson or a Petros Peterson. What’s the password?

Posted by Uncle_Billy | Report as abusive

More reassuring news on Basel III

Felix Salmon
Sep 9, 2010 15:30 UTC

Robert Peston provides the latest piece of the Basel III puzzle, adding to last night’s report from Australia: while the Tier 1 capital ratio looks set to be 8%, the core Tier 1 capital ratio — the bit which is hardest to game, and which is basically just pure equity — seems to be 7%. That number seems to be made up of a base minimum of 4%, plus a 3% conservation buffer.

Peston also helps out on the way the battle lines are being drawn: while Germany, France, Italy and Japan are pushing for lower ratios, it’s the U.S., UK and Switzerland which want higher ratios: Peston says they were pushing for something between 8% and 9%.

The U.S., UK, and Switzerland, of course, between them account for the overwhelming majority of the world’s global banks. So if their regulators get tough on capital rules, making it clear to the likes of JP Morgan, Barclays, and UBS that they would really like to see core equity closer to 9% than 7%, then we might even end up in a rule where the de facto global standards are tougher than the de jure Basel regulations. Which would be no bad thing at all.


From recollection LEH tier one capital was 11% a couple of weeks before it went bankrupt, which of course is well above the Basel 3 requirements. I also seem to vaguely remember that UBS had the best core tier one going into the crisis.

Of course if you use equity for your capital solvency then this is naturally a in tune with the cycle, equity goes up during the boom and as soon as you hit a rough spot it goes down then causing your reported capital reserves to go down causing people to sell your shares and so on.

Posted by Danny_Black | Report as abusive